December 2019

Market Strategy
December 2019
Amit Agarwal, CFA

agarwal.amit@kotak.com
MARKET OUTLOOK FOR DECEMBER 2019
+91 22 6218 6439
Series of intervention by the Finance Ministry in the last two months has changed the mood
of the market. After the reduction in corporate tax rate, earnings have picked up in Q2FY20 and
FPIs have turned positive on India. There has been a disconnect between the macroeconomic
environment and markets, which could stay for some time as high frequency indicators are not
showing any signs of macro improvement. The current downturn is partly due to structural
factors and thus, mere fiscal and monetary stimulus may not be adequate to revive the
economy. Sentiment and FPI inflows are driving markets even though most leading macro
indicators are weak and the slowdown looks more structural than cyclical. NSDL data shows,
FPIs have infused a net amount of Rs 242 bn into equities in November 2019. Future FPI flows
will mostly depend on both the global and domestic headwinds and how the government
tackles the ongoing slowdown in the Indian economy.
The Indian market’s high valuations are also supported by a combination (1) low global and
domestic bond yields, (2) market expectations of a China-US trade deal and possible global
economic recovery on the back of that, (3) market expectations of further reforms in India,
perhaps emboldened by the corporate tax cut and (4) Street expectations of strong earnings
recovery over FY20-22.
In the backdrop of the results of the recent assembly elections in Maharashtra and Haryana
and upcoming state elections, it would be interesting to watch the government’s response to
a weaker-than-expected performance in these two state elections post a thumping win in the
national elections less than six months ago. It may push the government to expedite policy
measures to address the ongoing economic slowdown. The market is also hopeful of a cut in
individual income tax and/or GST rates and several consumer discretionary (automobile)
stocks have rallied on the back of rising expectations of a fiscal stimulus to consumption.
However, we are not ruling out the central fiscal deficit slipping closer to 4%. versus the budget
target of 3.3% as (1) tax revenues have been largely stagnant with GST revenues flattish since
the inception in July 2017 and (2) the government cut the corporate tax rate in September
2019. The government may also struggle to meet its non-tax revenues without acceleration in
the divestment program. We also believe that, India’s high consolidated fiscal deficit may
constrain the ability of central and state governments to spend on infrastructure investment.
The government may have to implement major reforms in (1) the factors of production to
increase investment in manufacturing and (2) the ownership and pricing policies to increase
private sector investment in infrastructure.
The Nifty-50 Index is trading at 22.4X FY20E earnings (free-float basis) and 17.7X FY21E EPS
earnings. This high valuation is a big risk factor for the market as we remain sceptical about
any quick recovery in the economy given structural challenges. The underperformance of the
Small Cap index relative to the Nifty-50 has come closer to its three previous instances seen
in the last 15 years. Similarly, on valuations, the Fw PE of Mid Cap Index is trading at a 12%
discount to the Fw PE of Nifty-50. This portrays the future upside potential in mid & small caps
visa-a-vis the large caps.
For the mid & small caps to outperform the large caps we need a broad recovery in the
economy with improved credit off take, better print of IIP & GDP growth. Hopefully, if the
forthcoming Union Budget provides some incentives to tax payers and investors then we could
see a broader rally in the market which could then revive interest in the mid & small cap space.
A base for future outperformance of mid & small cap has been set in this calendar year which
could fructify in next calendar year as and when we see broader recovery in the economy. It is
ideal to increase exposure in mid & small caps vis-à-vis large caps in one’s portfolio with a two
to three year view.
Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Market Strategy
December 2019
1-year performance of benchmark global indices (%)
MSCI India 8.3%

Hang Seng Index 1.9%
MSCI Asia Pacific 7.8%
FTSE Index 5.6%
DAX Index 17.6%
MSCI World Index 13.2%
Dow Jones Index 11.1%
S&P 500 Index 15.2%
NIKKEI Index 5.3%
Nasdaq Index 19.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Source: Bloomberg dated 29 November 2019
Market performance – sector wise (November 2019)
9.0%
7.0%
6.0% 4.6%
3.8%
2.6%
3.0% 1.9% 1.8%
1.0%
0.3%
0.0%
-3.0% -1.7%
-3.1%
-6.0% -4.0% -4.2%
-9.0% -7.8%
TOP INVESTMENT IDEAS

Valuation Summary
Company CMP Target Potential Mkt EPS (RS) EPS growth (%) PE/PBV# (x) RoE (%)
(Rs)* Price Upside Cap FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
(Rs) (%) (Rs mn)
FIEM Industries Ltd 433 549 26.9 5,694 46.0 54.9 9.0 19.3 9.4 7.9 12.0 13.0
Escorts Ltd 637 1,030 61.6 78,106 52.0 63.0 (4.5) 21.1 12.3 10.1 13.6 14.5
Jyothy Labs Ltd 179 200 11.8 65,712 6.2 7.0 10.6 13.6 28.9 25.5 16.6 17.6
Sun Pharmaceutical Industries 450 480 6.7 1,079,338 19.0 23.8 17.5 25.3 23.7 18.9 10.5 11.3
Federal Bank Ltd 89 120 35.0 176,744 8.4 10.2 33.3 22.5 1.3 1.2 11.9 13.3
GAIL India Ltd 126 175 38.8 568,503 13.5 14.8 (3.2) 9.9 9.3 8.5 13.3 13.5
Source: Kotak PCG & KIE* (Kotak Institutional Equities); # Federal Bank are valued on PBV or Price/BV while rest of the stocks are valued on PE.; Source: KIE India Daily dated 29
Nov’19 and Stock Reco report of Kotak PCG dated 29 Nov’19.
Market Strategy
December 2019
INTERNATIONAL MARKETS
US and China agree to tentative truce on trade war
President Donald Trump heralded a breakthrough in U.S.-China trade talks, and markets rallied
in relief over a de-escalation in tensions and economy-damaging tariffs between the world's
two biggest economies. US has agreed (tweeted by President Trump) to suspend a tariff hike
on $250 billion from worth of Chinese imports. US President Trump also tweeted that, in
response the Chinese have agreed to buy $40 billion to $50 billion in U.S. farm products. But
nothing is in media.
As per media reports (NY times and Washington Post), U.S. and China are working to sign a
tentative trade war truce. But nothing's on paper and details are scarce about whether the end
to the 15-month trade war is in sight. It is unclear whether Trump will give any sort of deadline
for the talks to reach an agreement. Infact, NY times and Washington Post reported that the
U.S. is still scheduled to target another $160 billion of Chinese imports into US on 15 Dec.
2019, a move that would extend Trump's tariffs to virtually everything China ships to the United
States.
The two countries are deadlocked primarily over U.S. allegations by Trump on twitter, that
China deploys predatory tactics including outright theft—to become the global leader in
robotics, self-driving cars and other advanced technology. China has been reluctant to make
the kind of substantive policy reforms that would satisfy the Trump administration. Doing so
would likely require scaling back China's aspirations for technological supremacy, which China
sees as crucial to its prosperity.
Recently, the U.S. House of Representatives passed a bill intended to support protesters in
Hong Kong which prompted China to accuse the U.S. of interfering in domestic affairs.
The above discussion underscores the complexity of US/China negotiations, consistent with
our ongoing view that, over the medium term, there does not appear a reliable path to bridging
core trade differences that would lead to meaningful tariff de-escalation.
The US-China Trade War: Important timeline

Date Event
As on date Total US tariffs applied exclusively to Chinese goods: US$550 billion

As on date Total Chinese tariffs applied exclusively to US goods: US$185 billion
Day 493-494 November 7-8, 2019 – US and China Talk Tariff Rollback
Day 487 November 1, 2019 – China wins WTO case, able to sanction US$3.6 billion worth US imports
Day 470 October 18, 2019 – US tariff exclusion process for US$300 billion of Chinese imports
Day 463 October 11, 2019 – US delays tariff increase for Chinese goods
Day 442 September 20, 2019 – US releases new tariff exemption lists
Day 441-442 September 19-20, 2019 – US-China mid-level trade talks in Washington
Day 433 September 11, 2019 – China unveils tariff exemption list for US imports
Day 414 August 23, 2019 – China announces US$75 billion in tariffs on US goods
Day 397 August 6, 2019 – US declares China is a currency manipulator
Day 369 July 9, 2019 – US exempts 110 Chinese products from 25 percent tariffs
Day 331 June 1, 2019 – China increases tariffs on US$60 billion worth of products
Day 310 May 10, 2019 – US increases tariff from 10 percent to 25 percent
Day 209-210 January 30-31, 2019 – US and China hold 2-day trade talks in Washington D.C.
Day 150 December 2, 2018 – US and China agree to temporary truce
Day 75 September 18, 2018 – China announces retaliation for US tariffs
Day 33 August 7, 2018 – Second round of tariffs finalized and released by US
Day 29 August 3, 2018 – China announces second round of tariffs on US products
Day 1 July 6, 2018 – US implements first China-specific tariffs US
Source: China Briefing
Market Strategy
December 2019
UK growth 'slowest in almost a decade'

The UK economy avoided a technical recession in the third quarter of the year and reported
growth of 0.3 % in a sluggish third quarter of 2019 marred by Brexit uncertainty, and a global
slowdown. The growth was not as fast as the 0.4% forecast by economists, including that by
Bank of England. The dominant services sector was the main driver of GDP growth in the
quarter with industrial production and construction sectors adding little to overall UK GDP
growth. The final quarter of 2019 could be weaker as stockpiles continue to be run down.
UK GDP had shrank 0.2% in the second quarter of and a further contraction in third quarter
would have meant a recession and dealt a major blow to Mr. Johnson’s hopes of securing a
victory in next month’s general election.
UK quarterly GDP (%) since the financial crisis
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
UK Elections
The UK election will take place on 12th December, 2019 making it the first winter poll since
1923.MPs backed the pre-Christmas election by 438 votes to 20, having rejected it three times
previously, after Boris Johnson agreed to ask the European Union (EU) for a fresh Brexit delay.
The incumbent Prime Minister Boris Johnson has given commitment in UK parliament to take
the UK out of the EU at any cost. Opinion polls so far show the Conservative Party in the lead.
IMF cuts Eurozone growth forecasts due to slowdown in Germany, Italy

The IMF has cut the Eurozone growth to 1.2% for 2019 (from 1.3%) this year, revising
downwards its April estimates of 1.3% growth, a significant slowdown compared to last year’s
1.9% expansion. While IMF estimates, the Eurozone economy to grow by 1.4 percent in 2020
and 2021 respectively, cutting its previous estimate of 1.5% growth in both years. The
slowdown is mostly due to anemic growth in Germany, the Eurozone’s largest economy, and
stagnation in Italy, the third-biggest. Germany is now expected to grow by only 0.5% in CY19,
slower than the 0.8% the IMF had predicted in April. That would be one-third of 2018 growth.
Slowdown is also due to impact of global trade tensions on the bloc’s export-driven industry.
Newly elected ECB President Christine Lagarde will chair the ECB meet on 12th December,
where she is expected to call for a coordinated approach to fiscal and monetary policy
amongst member countries.
Market Strategy
December 2019
Euro GDP (%)
1.0
0.8
0.6
0.4
0.2
0.0
May-15
Sep-15
May-16
Sep-16
May-17
Sep-17
May-18
Sep-18
Nov-18
May-19
Sep-19
Mar-15
Nov-15
Mar-16
Nov-16
Nov-17
Mar-19
Jan-16
Jan-17
Mar-17
Mar-18
Jan-18
Jan-19
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Hong Kong elections

Hong Kong's protest movement grabbed the world's attention with million-strong rallies and
city-stopping unrest. But it won big recently by staying silent. The landslide victory for pro-
democracy candidates in 24th November district council elections is a stinging rebuke to the
incumbent pro-China government -- and an example of what protesters can achieve given the
opportunity. The elections saw more than 2.9 million voters — a record turnout of 71% —
delivered the pro-democracy camp 17 of 18 districts and more than 80% of contested seats,
the biggest electoral victory for the movement since Hong Kong’s handover from British rule
in 1997. It also sent a message to China that people in Hong Kong want democracy, not
overbearing control by Beijing, and that they were prepared to look past protesters’ violence.
Contained Crude prices

Global oil demand in Q3CY19 increased by 1.1 million barrels per day (mbpd) YoY, more than
double of 435 kbpd of Q2CY19. China’s demand increased by 640 kbpd YoY in Q3CY19, the
biggest contributor to global growth. In Q4CY19, International Energy Agency (IEA) expects
further acceleration in global crude demand growth to 1.9 mbpd, on a weak Q4CY18 and robust
US petrochemical demand. IEA growth forecasts for CY19 and CY20 are unchanged, at 1 mbpd
(total 100.2 mbpd) and 1.2 mbpd (total 101.4 mbpd), respectively. The growth forecast is based
partly on the International Monetary Fund’s expectation of 3.4% GDP growth in CY20. However,
the health of the global economy remains uncertain in spite of recent positive news about the
US-China trade dispute.
U.S. crude stocks swelled by 1.6 million barrels as on November 28th data as production hit a
record high at 12.9 million barrels per day. That countered optimism that a U.S.-China trade
deal was drawing closer, which may support stronger economic growth and fuel crude demand
and prices. Next week’s meeting of the Organization of the Petroleum Exporting Countries
(OPEC) and allies including Russia will be important as the group has been withholding output
to support prices.
Brent crude has corrected by 9.3% in the last 6 months. KIE estimates crude to average USD70
per barrel in CY19 and USD65 per barrel in CY20.
Market Strategy
December 2019
Global oil demand-supply

Particulars 2015 2016 2017 2018 2019E 2020E
Demand (mn bpd by IEA) 95.3 96.4 98.2 99.3 100.3 101.5
Supply (mn bpd by IEA)
- Non OPEC 59.8 59.3 60.1 62.9 64.8 67.0
- OPEC 36.6 37.8 37.5 37.4 36.0 36.0
Total Supply 96.4 97.1 97.6 100.3 100.8 103.0
Brent crude (USD/barrel by KIE) 86.0 48.0 49.0 58.0 70.0 65.0
Source: IEA, Kotak Institutional Equities estimates
Currency market
Persistent US dollar (USD) strength, trade frictions, slowing global growth trends and Brexit
uncertainty will likely shape the direction of major currencies in the final quarter of the year
(and possibly beyond). The USD has fared better than expectation in CY19 and remains
resilient amid softer US yields and signs that the US economy is losing momentum. Going
forward, global slowdown trade war, Brexit, and other geo-political uncertainties will increase
the USD’s safe haven status and lift investor demand for the currency. We expect a more
gradual depreciation in the INR versus USD in FY20 versus the steep depreciation seen in
FY19; we model INR-USD rate at INR 71.1/US$ for FY20 versus INR 69.9/US$ in FY19 and INR
64.5/US$ in FY18.
USD to INR
75.0
70.0
65.0
60.0
55.0
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
May-17
Sep-17
May-18
Sep-18
May-19
Sep-19
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jan-14
Jul-14
Nov-14
Jan-15
Jul-15
Nov-15
Nov-16
Jan-16
Jul-16
Jan-17
Jul-17
Nov-17
Jan-18
Jul-18
Nov-18
Jan-19
Jul-19
Nov-19
Gold corrects on hopes of US China trade deal

International Gold prices crossed the USD 1500/ounce mark this year when the fear of trade
war was at the peak. As the rhetoric on trade war has subsided international Gold price has
corrected to ~USD 1468/ounce. As per IMF, central Banks led by China have been adding Gold
to their reserves which has driven the demand for gold. Fed & ECB have again turned dovish
and changing their monetary policy to avert any slowdown. If we see any resolution to the
Trade War then the uncertainty factor will take a back seat and it could lead to further
correction in international gold prices. Based on today’s assessment we feel international gold
prices could correct further. If the trade war subsides then we can expect the Yuan to stabilise
and other emerging market currencies including INR should trade in a range. Keeping these
factors in mind one can look for a 5-10% correction in gold price to turn buyers.
Market Strategy
December 2019
Prices of Gold (USD/Ounce)

1,600
1,500
1,400
1,300
1,200
1,100
1,000
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
May-14
May-15
May-16
May-17
May-18
May-19
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jan-14
Nov-14
Jan-15
Jul-15
Nov-15
Jan-16
Nov-16
Jan-17
Nov-17
Jan-18
Jul-18
Nov-18
Jan-19
Nov-19
Jul-14
Jul-16
Jul-17
Jul-19
Market Strategy
December 2019
DOMESTIC MARKETS
Indian market is currently facing rich valuations which is at odds with the weak state of the
economy and so is the large price-value gap for both ‘growth’ and ‘value’ stocks. The market
and ‘quality’ part of the market are largely factoring in a reasonable recovery in the economy
and earnings. We remain skeptical about any quick recovery in the economy given structural
challenges. Earnings will recover faster due to (1) corporate tax cut and (2) lower loan-loss
provisions for banks.
2QFY20 RESULTS WERE AHEAD OF EXPECTATIONS

Adjusted net profits of the BSE-30 Index increased 1% YoY versus our expectation of 6.3% yoy
decline and adjusted net profits of the Nifty-50 Index declined 3.2% YoY, but was 3% ahead of
our expectation of 6.1% YoY decline. We note 2QFY20 EBITDA/net profit numbers are not
comparable with base numbers given (1) reduction in corporate tax rates (announcement
made on September 20, 2019) and (2) adoption of Ind-AS 116 (from April 1, 2019). These two
changes skewed EBITDA and net income growth but not PBT. We thus compare PBT to assess
the underlying performance in Q2FY20 earnings.
The table below compares 2QFY20 PBT of Nifty stocks with 2QFY19, 1QFY20 and 2QFY20E
PBT. Among Nifty-50 Index stocks that significantly outperformed our estimates at the PBT
level were (1) Cipla (led by growth in domestic business), (2) Dr Reddy’s (boosted by one-time
licensing income), (3) Maruti Suzuki (cost reduction, better-than-expected other income), (4)
NTPC (surcharge income of Rs6.5 bn boosted earnings) and (5) Tata Motors (strong JLR
performance).
Market Strategy
December 2019
Comparison of 2QFY20 PBT of Nifty-50 stocks, actual versus expected

PBT
Company Sector Q2FY19 Q1FY20 Q2FY20A Q2FY20E A versus E YoY QoQ
Bajaj Auto Automobiles & Components 16.5 15.8 16.1 16.1 0.0 (3.0) 2.0
Eicher Motors Automobiles & Components 7.4 7.1 6.0 6.3 (5.0) (19.0) (15.0)
Hero Motocorp Automobiles & Components 14.5 11.4 11.0 10.0 9.0 (24.0) (3.0)
Mahindra & Mahindra Automobiles & Components 21.6 13.7 17.6 16.9 4.0 (19.0) 28.0
Maruti Suzuki Automobiles & Components 32.1 19.1 15.7 11.9 32.0 (51.0) (18.0)
Tata Motors Automobiles & Components 2.1 (29.9) 7.0 (3.6) 292.0 238.0 123.0
Axis Bank Banks 11.7 20.8 24.3 34.1 (29.0) 109.0 17.0
HDFC Bank Banks 76.6 85.3 90.0 75.3 19.0 17.0 5.0
ICICI Bank Banks 12.6 27.9 43.7 41.0 6.0 248.0 56.0
IndusInd Bank Banks 14.0 21.6 18.6 17.1 9.0 33.0 (14.0)
Kotak Mahindra Bank Banks 25.5 29.1 29.4 33.1 (11.0) 15.0 1.0
State Bank of India Banks 18.1 40.6 50.6 43.3 17.0 179.0 25.0
YES Bank Banks 14.3 1.7 1.2 (13.2) 109.0 (91.0) (30.0)
Bajaj Finance Diversified Financials 14.3 18.5 20.2 18.8 8.0 41.0 9.0
Bajaj Finserv Diversified Financials 18.1 22.6 26.3 25.9 1.0 45.0 16.0
HDFC Diversified Financials 34.9 39.9 45.3 46.9 (3.0) 30.0 14.0
L&T Capital Goods 28.5 26.6 33.0 34.4 (4.0) 16.0 24.0
Asian Paints Commodity Chemicals 7.4 10.1 8.4 9.9 (16.0) 13.0 (17.0)
Grasim Industries Construction Materials 11.1 6.5 6.5 9.2 (29.0) (41.0) 1.0
UltraTech Cement Construction Materials 5.4 18.9 9.5 13.6 (30.0) 77.0 (50.0)
Britannia Industries Consumer Staples 4.6 4.1 5.0 4.6 9.0 9.0 23.0
Hindustan Unilever Consumer Staples 21.9 25.6 23.6 25.6 (8.0) 8.0 (8.0)
ITC Consumer Staples 43.7 48.1 48.1 47.5 1.0 10.0 0.0
Nestle India Consumer Staples 6.9 6.7 7.1 7.4 (5.0) 3.0 6.0
NTPC Electric Utilities 30.0 36.7 43.7 33.5 30.0 45.0 19.0
Power Grid Electric Utilities 29.3 33.0 32.8 32.6 1.0 12.0 0.0
UPL Fertilizers & Agricultural Chemicals 4.6 3.0 4.8 7.9 (39.0) 5.0 59.0
GAIL (India) Gas Utilities 28.7 19.8 17.2 19.0 (9.0) (40.0) (13.0)
HCL Technologies IT Services 32.0 29.3 34.9 33.0 6.0 9.0 19.0
Infosys IT Services 56.3 51.7 55.0 53.6 2.0 (2.0) 6.0
TCS IT Services 103.6 106.4 105.3 110.6 (5.0) 2.0 (1.0)
Tech Mahindra IT Services 14.6 12.9 13.4 12.3 9.0 (8.0) 4.0
Wipro IT Services 24.2 30.7 31.3 30.4 3.0 30.0 2.0
Zee Entertainment Ent Media 6.5 7.4 6.8 6.1 11.0 4.0 (9.0)
Hindalco Industries Metals & Mining 4.7 0.6 1.4 1.0 40.0 (71.0) 139.0
JSW Steel Metals & Mining 30.3 17.9 2.0 6.8 (70.0) (93.0) (89.0)
Tata Steel Metals & Mining 52.1 15.7 (2.1) 1.9 (212.0) (104.0) (113.0)
Vedanta Metals & Mining 23.0 20.8 15.4 18.5 (16.0) (33.0) (26.0)
BPCL Oil, Gas & Consumable Fuels 18.7 13.5 16.6 18.1 (9.0) (12.0) 22.0
Coal India Oil, Gas & Consumable Fuels 51.2 70.1 42.8 35.5 21.0 (16.0) (39.0)
IOCL Oil, Gas & Consumable Fuels 49.2 47.5 8.1 33.8 (76.0) (83.0) (83.0)
ONGC Oil, Gas & Consumable Fuels 127.1 90.6 90.4 84.2 7.0 (29.0) 0.0
Reliance Industries Oil, Gas & Consumable Fuels 132.0 143.4 150.0 149.2 1.0 14.0 5.0
Cipla Pharmaceuticals 5.1 6.6 6.8 5.7 19.0 34.0 3.0
Dr Reddy's Laboratories Pharmaceuticals 5.9 4.9 7.5 5.5 37.0 29.0 55.0
Sun Pharmaceuticals Pharmaceuticals 13.3 16.5 14.2 14.5 (1.0) 7.0 (14.0)
Titan Company Retailing 4.7 5.2 4.3 5.2 (18.0) (10.0) (18.0)
Bharti Airtel Telecommunication Services (20.2) (16.3) (9.4) (15.5) 39.0 53.0 42.0
Bharti Infratel Telecommunication Services 10.2 9.4 8.8 9.7 (10.0) (14.0) (6.0)
Adani Ports and SEZ Transportation 13.2 14.0 13.2 14.6 (9.0) 0.0 (5.0)
Nifty-50 Index 1314.0 1283.0 1279.0 1260.0 1.5 (2.6) (0.3)
Source: Bloomberg, Companies, Kotak Institutional Equities estimates
Market Strategy
December 2019
IIP growth slumps again

September IIP growth was at -4.3% (Kotak: -0.8%; consensus: -2.5%; August: -1.4%) led by weak
momentum and adverse base effects. Consequently, IIP growth for 2QFY20 was poor at -0.4%
as against 3% in 1QFY20.Contraction was broad based with capital goods, consumer durables,
infrastructure & construction goods, and primary goods led the slowdown, contracting by -
20.7%, -9.9%, -6.4%, and -5.1% respectively.
Sectoral Classification of IIP

Mining (%) Manufacturing (%) Electricity (%) General (%)
2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020
April 3.0 3.8 5.1 2.9 4.9 4.0 5.4 2.1 6.0 3.2 4.5 4.3
May 0.3 5.8 3.2 2.6 3.6 2.5 8.3 4.2 7.4 2.9 3.8 3.1
June 0.1 6.5 1.5 (0.7) 6.9 0.2 2.1 8.5 8.2 (0.3) 7.0 1.2
July 4.5 3.4 4.9 (0.1) 7.0 4.2 6.6 6.6 4.8 1.0 6.5 4.3
August 9.3 (0.6) 0.0 3.8 5.2 (1.6) 8.3 7.6 (0.9) 4.8 4.8 (1.4)
September 7.6 0.1 (8.5) 3.8 4.8 (3.9) 3.4 8.2 (2.6) 4.1 4.1 (4.3)
October (0.2) 7.3 2.0 8.2 3.2 10.8 1.8 1.8
November 1.4 2.7 10.4 (0.7) 3.9 5.1 8.5 8.5
December 1.2 (1.0) 8.7 2.9 4.4 4.5 7.3 7.3
January 0.3 3.8 8.7 1.3 7.6 0.9 7.5 7.5
February (0.4) 2.2 8.4 (0.3) 4.5 1.3 6.9 6.9
March 3.1 0.8 5.7 0.1 5.9 2.2 5.3 5.3
Average 2.5 2.9 4.7 3.7 5.3 5.2 4.4 4.4
Source: CEIC, Kotak Institutional Equities
GDP growth slips to a 26-quarter low

Consistent with the meltdown witnessed in the high frequency indicators, real GDP growth
moderated sharply to 4.5% (Kotak: 4.7%, Consensus: 4.5%, 1QFY20: 5%). Within industry,
manufacturing growth slumped to -1% (0.6% in 1QFY20), consistent with the downtrend
witnessed in the IIP data. In sync with the distress in real estate, construction growth slowed
to 3.3% (5.7% in 1QFY20). Electricity and mining segment growths slowed to 3.6% and 0.1%
respectively. Services sector growth moderated marginally to 6.8%. Within services, while
growth in ‘trade, hotels, transport, and communication’ and in ‘financial, real estate, and
professional services’ slowed to 4.8% and 5.8% respectively, growth in ‘public administration,
defence and other services’ rose by 11.6% amid a revival in government spending. GVA growth
in the agricultural sector improved marginally to 2.1% (2% in 1QFY20). 1HFY20 GDP growth
now stands at 4.8% (6.2% in 2HFY19).
Revise down our FY20 GDP growth estimate further by 30 bps to 4.7%
While favorable base effects, increased pace of government spending, lower short-term rates
due to lower policy rates and easier liquidity conditions could provide some support to growth
in 2HFY20, we see limited room for a meaningful revival in activity in the months ahead. The
government’s fiscal space to support economic activity is limited after the corporate tax rate
cuts and GST shortfall. High frequency data for October/November suggest that economic
activity weakened further despite festive season demand. With the growth slowdown
remaining entrenched, we further revise down our FY20 GDP estimate by 30 bps to 4.7%.On
the policy front, we expect the MPC to look through the impact of higher food prices after a
dismal 1HFY20 growth and take cues from the moderating core inflation. The MPC will have
to revise down the FY20 GDP estimate from 6.1% while revising higher the near-term CPI
inflation trajectory. We reiterate our call of another 50 bps of repo rate cuts through the rest of
FY20. Beyond that, the MPC will likely stay on hold and focus on transmission as the GDP
growth gradually reverses to 5.5-6.0% and inflation hovers slightly above the 4% mark.
Market Strategy
December 2019
FY20 GDP growth at 4.7%

Components FY14 FY15 FY16 FY17 FY18 FY19 FY20
Real GVA 6.1 7.2 8.0 7.9 6.9 6.6 4.5
Agriculture and allied 5.6 (0.2) 0.6 6.3 5.0 2.9 2.8
Industry 3.8 7.0 9.6 7.7 5.9 6.9 1.2
Mining 0.2 9.7 10.1 9.5 5.1 1.3 (0.8)
Manufacturing 5.0 7.9 13.1 7.9 5.9 6.9 (0.2)
Electricity 4.2 7.2 4.7 10.0 8.6 7.0 3.7
Construction 2.7 4.3 3.6 6.1 5.6 8.7 4.2
Services 7.7 9.8 9.4 8.4 8.1 7.5 6.9
Trade, hotel, transport, communication 6.5 9.4 10.2 7.7 7.8 6.9 5.5
Financial, real estate, professional services 11.2 11.0 10.7 8.7 6.2 7.4 5.9
Real GDP 6.4 7.4 8.0 8.2 7.2 6.8 4.7
Source: CEIC, Kotak Economics Research estimate
CPI inflation at a 16-month high, while WPI inflation moderates

October CPI inflation rose to 4.62% (Kotak: 4.21%, consensus: 4.35%, September: 3.99%) owing
to sharp sequential uptick despite favorable base effects. The increase was led by higher food
inflation of 7.9% (5.1% in September) owing to strong gains across vegetables (26.1%), pulses
(11.7%), meat and fish (9.7%), and eggs (6.3%).However, CPI excluding vegetables at 3.1%
remains subdued. Expectedly, core inflation moderated to 3.3% (4.2% in September) on the
back of subdued economic activity. Even, October WPI inflation moderated to 0.16% (Kotak: -
0.2%%, Consensus: -0.24%) as against 0.33% in September owing to favorable base effects
despite growing momentum The moderation was primarily due to softening in manufacturing
and fuel and power inflation.
CPI inflation likely to trend towards 4.6% by March 2020
12
CPI (%) WPI (%)
9
6 4.6%
3
0 2.0%
-3
-6
-9
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Dec-13
Jun-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Source: Bloomberg dated 28 Nov 2019
Risks to our base case of a 50 bps rate cut through the rest of FY20
CPI and WPI inflations both were largely led by higher food inflation, even as core inflation
remains muted. With CPI inflation likely to overshoot the MPC’s target of 4% by around 75-125
bps over the next few months, we believe that the policy decision will be split among the MPC
members given that inflation is trending above 4.7% and growth is likely to be below 5% in
2QFY20. If the MPC members believe that the recent increase in food inflation is transient and
assign higher weightage to the moderating core inflation, they may continue to focus on
reviving growth and look through the recent and upcoming inflation readings. MPC members’
perception about ‘flexible inflation targets’ will be tested in the December policy. We believe
that maintaining accommodative financial conditions in the current subdued environment is
essential, which will likely prompt the MPC to cut rates. While we continue to see room for
Market Strategy
December 2019
monetary easing amid weakening growth, a higher inflation trajectory poses risks to our base
case of 50 bps of rate cuts.
Weak GST collections

Based on the monthly PIB release, total GST collection was at Rs1,035 bn for November (Rs954
bn in October)—growth of 6% over November 2018, propped up due to festive demand.
Domestic GST collections growth picked up to 12.4% (0.4% in October). The number of returns
filed in increased to 7.8 mn in November 2019 (7.4 mn in October).
Monthly GST collections have remained stagnant in FYTD20 (Rs bn)

Month CGST SGST IGST Cess Total Filings (mn)
18-Jun 160 220 495 81 956 6.5

18-Jul 159 223 500 84 965 6.6
18-Aug 153 212 499 76 940 6.7
18-Sep 153 211 501 80 944 6.7
18-Oct 165 228 534 80 1,007 6.7
18-Nov 168 231 497 80 976 7.0
18-Dec 164 225 479 79 947 7.2
19-Jan 178 248 512 87 1,025 7.3
19-Feb 176 242 470 85 972 7.3
19-Mar 204 275 504 83 1,066 7.6
19-Apr 212 288 547 92 1,139 7.2
19-May 178 245 499 81 1,003 7.2
19-Jun 184 253 478 85 999 7.4
19-Jul 179 250 596 86 1,021 7.6
19-Aug 177 242 490 73 982 7.6
19-Sep 166 226 451 76 919 7.6
19-Oct 176 237 465 76 954 7.4
19-Nov 196 271 490 77 1,035 7.8
Source: Ministry of Finance, Kotak Institutional Equities
Without any expenditure cuts, government would need higher borrowings

Expectedly, November GST collections registered an increase owing to festive demand, but
any sustained rise might be difficult given that the slowdown is becoming more entrenched.
Gross tax revenues up to 8MFY20 have grown at a disappointing pace of 1.2%, with 3.5%
growth in direct taxes and -1% growth in indirect taxes. On the other hand, the government’s
expenditure growth has been robust at 13.6% (both in revenue and capital expenditure).This
pace might not sustain if the government aims to remain somewhere close to the budgeted
GFD/GDP of 3.3%, but without this support, growth may not improve.
After accounting for higher divestment of around Rs1.3 TN in FY20, 23% higher than budgeted
target of Rs1.05 tn, part of the tax shortfall will also be met through excess RBI dividend and
likely higher dividend receipts from PSUs. Without any expenditure cuts, there is likely to be a
GFD/GDP slippage of 0.4-0.5% increasing the risks of higher borrowings (possibly in January-
February).However, if the government was to choose to stick to budgeted GFD/GDP, it may
rely on expenditure reductions in food subsidy, agriculture and farmers’ welfare (PM-KISAN)
and other smaller expenditure heads while possibly allocating a higher expenditure to rural
development (NREGA, etc.) to balance between restricting the extent of fiscal slippage and
supporting growth through government spending.
Market Strategy
December 2019
External sector remains weak

India’s merchandise exports fell by 1.1% in October, contracting for the third consecutive
month, while imports fell for the fifth month in a row by 19.5%, leading to a trade deficit of $11
billion. During the first seven months of FY20 (April-October), exports have contracted 2.3%,
while imports shrank 9.1% leading to a trade deficit of ~$95 billion. During the first seven
months of the fiscal (April-October), exports have contracted 2.2%, while imports shrank 8.4%
leading to a trade deficit of $95 billion. Out of the 30 major items each in India’s export and
import baskets, 18 export items and 22 imported goods witnessed contraction. We believe that
a weakening external sector will put additional pressure on India’s growth.
Escalating trade tensions and a slowing global economy have prompted the World Trade
Organization to sharply downgrade its trade growth forecast for 2019 to 1.2% (from 2.6%) and
2020 to 2.7% (from 3%).
Foreign trade for India in US $ bn

Trade Balance Oct-19 Oct-18 YOY (%) Sep-19 MOM (%) April to Oct 2019 April to Oct 2018 YOY (%)
Exports 26.38 26.67 (1.1) 26.03 1.3 185.95 190.15 (2.3)

Imports 37.39 44.68 (19.5) 36.89 1.3 280.67 306.31 (9.1)
Trade Balance -11.01 -18.01 (63.6) -10.86 1.4 -94.72 -116.16 (22.6)
Source: Bloomberg, Ministry of Commerce
Most high-frequency monthly indicators remain weak

H1FY20, high frequency indicators suggest that economic activity has continued to remain
weak due to a broad-based weakness in consumption and investment, even though there has
been some pick-up in government spending. The recent corporate tax rate cut is unlikely to
contribute substantially to growth in the near term as investments may remain on hold in the
absence of demand. While the 2HFY20 GDP growth is expected to be slightly better on the
back of favourable base effects, lower policy rates amid easier liquidity conditions and
government spending, FY20 GDP growth estimate is expected to remain muted at 4.7%.
Against this benign growth environment, we continue to see room for further monetary
accommodation of up to 50 bps.
Key growth indicators (yoy, %)

Industry Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19
Cement production 8.8 11.6 11.0 8.0 15.7 2.3 2.8 (1.7) 7.9 (4.9) (2.1) (7.7)
Commerical vehicle sale 5.7 (7.8) 2.2 (0.4) 0.3 (6.0) (10.0) (12.3) (25.7) (38.7) (39.1) (23.3)
IIP Manufacturing (0.7) 2.9 1.3 (0.3) 3.1 2.5 4.4 0.3 4.5 (1.6) (3.9)
Rail freight traffic 5.6 2.7 5.5 4.4 7.2 1.9 0.7 0.0 (1.3) (8.7) (11.2) (11.1)
Steel production 3.7 6.6 1.6 3.7 3.7 0.4 3.3 5.6 3.4 3.5 1.6 (1.6)
Airport passenger traffic 11.0 12.9 8.9 5.6 0.1 (4.4) 2.8 6.2 1.8 3.9 1.1 3.1
Passenger Vehicle sales (3.4) (0.4) (1.9) (1.1) (3.0) (17.1) (20.5) (17.5) (31.0) (31.6) (23.7) 0.3
Two wheeler sales 7.1 (2.2) (5.2) (4.2) (17.3) (16.4) (6.7) (11.7) (16.8) (22.2) (22.1) (14.4)
Source: CEIC, Kotak Institutional Equities
Convergence or continued divergence?

We face two challenges in assessing the Indian market’s valuations—(1) divergence between
a weak economy and a strong market; the Indian market is trading at rich valuations in the
context of historical valuations despite a sluggish economy and (2) divergence in price and
value of both ‘growth’/’quality’ and ‘value stocks; this is not a new phenomenon. The gap
between price and fair value of stocks continues to be quite high at both ends of the valuation
spectrum (‘growth’ and ‘value’) despite weak revenue growth for the ‘growth’ stocks and some
triggers for the ‘value’ stocks. We are not sure if, when and how the convergence will play out.
Market Strategy
December 2019
Limited options for government to reverse economic slowdown.

We note that the government has limited options to revive economic growth as:
(1) Fiscal stimulus may not be possible given the high fiscal deficit; high fiscal deficit rules out
a meaningful fiscal stimulus, especially as (1) tax revenues have been largely stagnant and (2)
the government cut the corporate tax rate in September 2019. We expect FY20 central
GFD/GDP to slip by 50-60 bps versus the target of 3.3%.
(2) Monetary policy has been rendered ineffective by government borrowing. The Indian
economy has seen limited benefits of the rate cuts by the RBI. The RBI has cut repo rates by
135 bps in CYTD19, but banks have reduced MCLR by about 55 bps. Bond yields have declined
meaningfully but they are less relevant for the economy. Bank rates are more relevant as a
bulk of India’s borrowing and lending is through the banking system. The government
competes with banks for deposits as it is a big borrower through the small savings scheme
funds route. Nonetheless, banks have finally started to reduce term-deposit rates, given the
high liquidity in the banking system, which should bode well for lower interest rates over the
next few quarters.
(3) Structural reforms may not be easy to implement and will, in any case, take time to show up
in higher investment and GDP growth. In our view, the government may have to implement
major reforms in (1) the factors of production to increase investment in manufacturing and (2)
the ownership and pricing policies to increase private sector investment in infrastructure. The
government did reduce the corporate tax rate in September 2019, which would suggest that
the government is keen to increase India’s investment rate. It has steadfastly worked to
improve India’s position in global ‘ease of doing business’ indices.
Push to privatization: Strategic sale in 5 PSUs

The government has met a good part of its fiscal requirements through divestments of its
stakes in PSUs over FY14-19.However, we note that the space for divestments is shrinking as
the government can only mobilize Rs1.2 tn by selling its direct exposure to listed entities up to
51% and Rs2.5 tn including indirect exposure through LIC and cross-holding of other PSUs. As
such, this route of revenue mobilization may run out in 1-2 years. However, we note the
government can raise significantly higher revenues through privatization (100% exit) of the
non-financial PSUs (~Rs10 tn).
The government is unable to maximize the value of its CPSE ownership due to low valuations
of PSU companies (de-rating of multiples of PSUs over the past few years), further accentuated
by sale through ETFs. We believe the government can raise significantly higher amounts if it
were to privatize the PSUs through (1) strategic sale of majority stake or (2) sale of its shares
in tranches to institutional and retail investors with an explicit commitment to reduce its
holding to below 50%. We would strongly argue against golden share or any form of residual
government control as it would lead to valid concerns about continued government influence
on the operations of the companies.
Market Strategy
December 2019
Privatisation options for Government

Market Cap Govt holding Stake sale
Company (Rs bn) % Entire (Rs bn) 51% (Rs bn)
ONGC 1,679 64.2 1,079 223

Coal India 1,221 71 867 244
NTPC 1,139 56.1 639 58
Indian Oil Corp. 1,306 52.2 681 15
Power Grid Corp. 996 55.4 552 43
BPCL 1,001 53.3 533 23
GAIL (India) 628 51.8 325 5
Container Corp. 354 54.8 194 13
Bharat Electronics 273 58.8 160 21
NMDC 274 72.3 198 58
Hindustan Aeronautics 249 90 224 97
NHPC 233 73.3 171 52
BHEL 181 63.2 114 22
Oil India 161 61.6 99 17
SAIL 142 75 106 34
State Bank of India 2,701 57.1 1,543 166
Bank of Baroda 382 63.3 241 47
GIC 346 85.8 297 120
Punjab National Bank 305 75.4 230 74
Power Finance Corp. 275 59 162 22
Bank of India 231 87.1 201 83
New India Assurance 175 85.4 149 60
Canara Bank 153 70.6 108 30
Allahabad Bank 116 79.4 92 33
UCO Bank 109 90.8 99 44
Corporation Bank 99 86.8 86 35
Union Bank of India 106 74.3 78 25
Indian Overseas Bank 94 92 86 38
Oriental Bank of Commerce 88 77.2 68 23
Syndicate Bank 81 76.2 61 20
Central Bank of India 82 91.2 75 33
Indian Bank 73 81.5 59 22
HUDCO 76 89.8 68 29
Bank of Maharashtra 69 87 60 25
United Bank of India 70 92.3 64 29
Andhra Bank 56 84.8 47 19
Total 9,816 1902
Source: Capitaline, Bloomberg, Companies, Kotak Institutional Equities
Government has set an aggressive enhanced target of Rs 1.05 trillion of disinvestment receipts
in Budget FY20. As part of its disinvestment or privatization strategy, the Union Cabinet on 20th
November gave approval to sell majority stake in BPCL, Concor and SCI before the end of FY20.
We believe, privatization will generate non-tax revenue and help government keep fiscal deficit
in check projected at 3.3% of GDP. Privatization is not a piecemeal sale of minority stake but
a full transfer of control. To help the privatization drive, government may lift restrictions on
foreign ownership and other onerous conditions. This will complement the current effort in
reviving investment.
Market Strategy
December 2019
Strong FPI inflows in November 2019

According to the latest NSDL data, FPIs have infused a net amount of Rs 252 bn into equities
in the month of November 2019. The consistent flows depict that FPIs are fast gaining
confidence in the Indian equity markets, after they made harried exit in the months of July and
August, due to measures such as rollback of super-rich surcharge, merger and recapitalization
of PSU banks, relief measures for the revival of automobile sector, rationalization of corporate
tax rates among others. On the global front, the major factor contributing towards FPI inflows
is expectation of a trade deal between the US and China. However, at the current juncture,
further FPI flows will mostly depend on both the global and domestic headwinds and how the
government tackles the ongoing slowdown in the Indian economy.
FPI/FII inflows YTD till Novermber 2019

Month Equity Debt Hybrid Total
January -42.62 -13.01 0.07 -55.56

February 172.20 -60.37 8.71 120.53
March 339.81 120.02 27.69 487.51
April 211.93 -50.99 6.34 167.28
May 79.20 11.87 22.64 113.70
June 25.96 83.19 21.96 131.11
July -124.19 94.33 -0.17 -30.03
August -175.92 116.72 0.49 -58.71
September 75.48 -9.90 0.25 65.82
October 123.68 36.70 0.31 160.69
November 252.31 -23.60 1.26 230.00
Total 937.84 304.96 89.55 1332.34
Source: NSDL
Economy in Focus in Winter Session of Parliament

The winter session of parliament, which will run till December 13, started on November 18 amid
concerns over the slowing economy, rising unemployment and farmers' distress. Among the
key bills to be discussed this session is the Citizenship Amendment Bill, Healthcare Service
Personnel and Clinical Establishments Bill, The Taxation Laws (Amendment) Bill, The
Pesticides Management Bill, The Mines and Minerals (Development and Regulation)
Amendment Bill and The Medical Termination of Pregnancy (Amendment) Bill. In addition, a
total of 10 bills are pending in the Rajya Sabha, including one to protect the rights of
transgendered persons and amendments to The Constitution (Scheduled Tribes) Order 2019,
which lists the tribal communities to be included.
The winter session will have 20 sittings between November 18 and December 13, and is
expected to discuss 27 new bills.
Important new bills in winter session

Finance and Corporate Affairs Others
The Taxation Laws (Amendment) Bill, 2019 Prohibition of Electronic Cigarettes Bill 2019
The Companies (Second Amendment) Bill, 2019 The National Commission for Indian System of Medicine
Bill, 2019
Chit Funds (Amendment) Bill, 2019 The Transgender Persons (Protection of Rights) Bill, 2019
The Industrial Relations Code Bill, 2019 The Personal Data Protection Bill
Competition Amendment Bill 2019 Citizenship (Amendment) Bill
Insolvency and Bankruptcy (2nd Amendment) Bill 2019 Personal Data Protection Bill.
Surrogacy (Regulation) Bill, 2019
Source: PRS Legislative Research
Market Strategy
December 2019
Politics
By-polls in Karnataka on December 5th
The Supreme Court on 13th November upheld the disqualification of the 17 Karnataka MLAs
on the orders of the then Assembly Speaker KR Ramesh Kumar but allowed them to contest
the by-elections to be held on December 5 for 15 seat that fell vacant in July, 2019.
The judgment is a big boost for the BS Yediyurappa BJP government in the state as the MLAs
— fourteen from the Congress and three from the JD-S — were hopeful of being given tickets
by the BJP to contest the by-elections to 15 seats.
Impasse in Maharashtra ends

After over a month since voters gave a fractured mandate in Maharashtra assembly elections,
the state has a government formed by an alliance of the Congress, Shiv Sena and NCP. The
Sena-NCP-Congress alliance represents the coming together of disparate partners, and it is
not clear if it will deliver coherent governance or be stable.
A weaker-than-expected performance by the BJP in Maharashtra elections may possibly spur

the government to focus on demand-revival and/or structural reforms. However, the market is
already expecting a fiscal stimulus to consumption in the form of GST/individual income tax
rate cuts. It would be interesting to see how the government balances its economic and
political objectives within the constraints of a stretched fiscal situation.
Seven states are due for elections in the next 18 months

State Incumbent Tentative schedule
Jharkhand BJP November 30 to December 20 (5 phase)
Delhi AAP January, 2020
Bihar JD(U)+BJP November, 2020
Assam BJP May, 2021
Kerala CPI(M) May, 2021
Tamil Nadu AIADMK May, 2021
West Bengal AITC May, 2021
Source: Election Commission of India
Market Strategy
December 2019
SECTORAL SNIPPETS
Automobiles
We expect net profits of the automobiles sector to decline 15% in FY20 due to sharp decline in
volumes, which in turn is due to extremely weak domestic demand conditions. However, we
expect a sharp bounce in net profits in FY21 entirely led by profits at Tata Motors (TTMT)
versus a loss in FY20 (and FY19). However, we do see risks to (1) domestic demand and
profitability, which will affect profits of the leading 2-W and 4-W companies and (2) global
demand, which may affect profits of TTMT although TTMT has made significant progress in
reducing costs on a structural basis to counter the ongoing global slowdown.
We assume (1) sharp decline in domestic volumes in FY20 despite our expectation of a
recovery in volumes in 2HFY20 due to pre-buying of vehicles before the implementation of BS-
VI fuel emission norms from April 1, 2020 and (2) moderate decline in gross and EBITDA
margins given higher costs related to implementation of new safety regulations (ABS/CBS
applicable from April 1, 2019 for 2-Ws and ABS applicable from July 1, 2019 for 4-Ws) and fuel
emission standards (BS-VI fuel standards applicable from April 1, 2020).
Banks and diversified financials (NBFCs)

We model the banks and diversified financial sectors to account for the bulk of the incremental
profits of the Nifty-50 Index in FY20 (91%) and FY21 (45%). We model a sharp surge in the
profits of certain banks (AXSB, ICICIBC and SBI) due to a steep decline in loan-loss provisions
driven by (1) peaking of NPLs and slippages in 4QFY19/1QFY20; NPLs have declined
moderately in 1HFY20 and slippages fallen sharply over the same period, (2) high provision
coverage ratio at end- FY2019, which would result in a decline in loan-loss provisions (LLP)
from FY2020 and (3) possible recovery on loans already written off on successful resolution
of a few large cases in the NCLT. At the same time, we model continued strong growth in the
net profits of the retail-oriented lenders.
For the NBFCs, we see pressure on NIMs/RoEs in general due to (1) higher cash balance on
the balance sheet of NBFCs as they negotiate the current tight liquidity conditions, which may
persist through FY20, (2) increased share of low-risk, low-yield retail loans (mortgage) in the
case of HFCs at the expense of high-risk, high-yield developer loans, (3) potential increase in
credit costs, especially for HFCs and (4) more competition from banks in all the lending
segments. We have already seen a squeeze on the NIMs of the HFCs due to increased
competition in the housing finance segment.
Oil and Gas

We note that the profits of the downstream oil companies have very high sensitivity to refining
margin. We assume a moderate decline in refining margins for FY20 versus FY19 levels.
Refining margins have come off from high levels seen in 3QCY19 on supply disruptions. We
expect refining margins to face headwinds from weaker global supply-demand balance; China
will bring on almost 1 mbpd of refining capacity in CY20. We do not expect upstream oil
companies to bear any subsidy burden in FY20-21 as was the case for the past few years.
Construction materials
We assume higher profitability for cement stocks under our coverage for FY20-22. We note
that realizations and profitability have increased sharply over the past 8-9 months. However,
we are not sure if prices will hold up as demand conditions have worsened significantly over
the past few months and capacity utilization will remain low for the sector on large supply-
demand imbalance through FY22.
Market Strategy
December 2019
Consumer products.
We expect the consumer product companies to deliver high single-digit/low double-digit
revenue growth in FY20 (lower than in previous years) led by (1) modest 3-5% volume growth
in most cases and (2) moderate increase in prices. However, we expect strong growth in net
profits (around 20%) in FY20 due to lower corporate tax rate. We note that demand conditions
have worsened significantly over the past quarter. However, a benign RM environment will
result in a further increase in margins, which have already jumped sharply in the past few years.
IT services
We expect net profit growth of IT stocks in the Nifty-50 Index to taper down to 3.8% in FY20
from 16% in FY19 as we expect (1) a more gradual depreciation in the INR versus USD in FY20
versus the steep depreciation seen in FY19; we model INR-USD rate at INR 71.1/US$ for FY20
versus INR 69.9/US$ in FY19 and INR 64.5/US$ in FY18, (2) decline in margins on higher costs
(higher share of on-shoring given industry and visa issues) and limited tailwind from currency
depreciation and (3) weaker demand from customers given worries about general slowdown
in global economic growth; FY19 revenues were also boosted by stronger demand from US
clients who increased spending on IT following tax cuts in CY18.
Metals & mining

We expect the net profits of the metal stocks in the Nifty-50 Index to decline 48% in FY20 after
a 7% growth in FY19. Tata Steel accounts for the bulk of our expected decline in net profits of
the metal stocks in the Nifty-50 Index given our cautious view on steel prices, which in turn
reflects (1) weaker global steel demand conditions and (2) normalization of iron-ore prices,
which were boosted by supply disruptions at a major supplier (Vale). We have already assumed
significant deterioration in prices of metals given our concerns about global economic
slowdown in general and slowdown in China in particular.
Pharmaceuticals
We expect 14% and 29% growth in the net profits of the pharmaceuticals sector in FY20 and
FY21 on the back of (1) pickup in new launches of generic products in the US from 2HFY19,
which will drive US generic revenues and overall, revenues and profits, (2) strong increase in
revenues of Sun’s specialty products, which would drive its overall revenues and (3) steady
growth in domestic pharmaceutical revenues. We expect US generic revenues to recover
sharply over FY20-21 on the back of new launches although the timing of the launches is still
somewhat uncertain, which may push back the recovery in revenues and profits.
Market Strategy
December 2019
One Year Rolling Fw PE chart of Nifty-50
Based on Bloomberg 21.0
consensus the one 19.0

year Fw PE of Nifty-
17.0
50 stands at 18.6x,
which is very close to 15.0
its previous peaks of 13.0

19x. 11.0
9.0
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Nov-18
Nov-19
Source: Bloomberg
One Yr Fw PE chart: Nifty-50 Vs Mid Cap 100 Index

The valuation 30.0
NSE Mcap Nifty 50
discount of Nifty Mid
Cap 100 Index Vs the 25.0
Nifty-50 on Fw PE
basis has narrowed 20.0
down to 12% (from
~20% in mid 2019). 15.0
10.0
5.0
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Apr-11
Aug-11
Apr-12
Aug-12
Apr-13
Aug-13
Apr-14
Aug-14
Apr-15
Aug-15
Apr-16
Aug-16
Apr-17
Aug-17
Apr-18
Aug-18
Apr-19
Aug-19
Dec-12
Dec-15
Dec-11
Dec-13
Dec-14
Dec-16
Dec-17
Dec-18
Dec-19
Dec-07
Dec-08
Dec-09
Dec-10
Source: Bloomberg
MSCI India Premium Over MSCI EM (on 1 Yr Fw PE basis)
MSCI India trades at 80%

48% premium over 70%
MSCI EM (based on
60%
Fw PE basis). The 10
Yr avg. premium 50%
works to 41%. 40%
30%
20%
10%
Dec-15
Dec-17
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Jun-16
Dec-16
Jun-17
Jun-18
Dec-18
Jun-19
Dec-19
Source: Bloomberg
Market Strategy
December 2019
GAIL: BUY
CMP: Rs.126 Fair Value: Rs.175 Market Cap: Rs.569 bn
 GAIL's management has indicated that (1) optimism on increase in LNG offtake by three
new fertilizer plants over the next six months, (2) on-track commissioning of the Kochi-
Mangalore pipeline by Dec'19, (3) annual capex guidance of Rs70 bn in FY20-21; Rs80 bn
has already been incurred on East India gas pipeline network and (4) the company may
move to lower tax rate regime later depending on utilization of MAT credit and other
considerations; KIE have assumed tax rates at lower levels of ~27% for now.
 KIE expects GAIL to benefit from (1) inclusion of gas under GST, (2) turnaround in petchem
segment post recent full ramp-up in plant utilization and likely improvement in efficiencies
and margins, (3) medium-term growth in gas volumes amid rising availability and favorable
policies and (4) potential realignment of tariffs under a new regulatory framework such as
unification to allow reasonable returns on gas pipeline assets.
 GAIL's adjusted net income declined 7% qoq to Rs11.9 bn (EPS of Rs. 2.6), boosted by
higher other income and lower tax rate. Adjusted EBITDA declined 23% qoq to Rs17.5 bn in
Q2FY20, led by (1) lower contribution from gas marketing and (2) decline in profits from
LPG/LHC segment amid lower prices, which was partly offset by a robust increase in gas
transmission EBITDA and volume-led improvement in petchem performance.
 KIE expects standalone EPS of Rs13.5 in FY20, Rs14.8 in FY21 and Rs.15.9 in FY22
factoring in (1) lower contribution from gas marketing, LPG/LHC and petchem segments,
(2) modestly higher other income and (3) other minor changes. KIE's SoTP-based fair value
is Rs.175. KIE's reverse valuation exercise, adjusted for the MTM value of investments,
implies that the stock is trading at an attractive 6.6X FY21E corebusiness EPS providing
adequate margin of safety against earnings volatility.
Note: The above is brief note on the company, based on the research report and update
available (dated: 9th Nov’19) on our website at:
https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html
Market Strategy
December 2019
FIEM INDUSTRIES LTD: BUY

CMP: Rs.433 Fair Value: Rs.549 Market Cap: Rs.5.7 bn
 FIEM's product portfolio comprises of automotive lighting, rear view mirrors, sheet metal
parts and plastic components for two /four wheeler segment. FIEM generates ~98% of its
revenues from the automotive business and balance revenue comes from the IPIS & LED
luminaries segment. Within the automotive space, FIEM is largely an OEM focused
company with ~93% of revenues coming from domestic OEM's and two wheeler segment
accounts for ~96% of automotive revenues. For FIEM, Honda Motorcycle and Scooters
India Limited (HMSI) and TVS Motors (TVSM) are the top clients.
 2QFY20 result - FIEM reported revenue of Rs3.71bn, 6% YoY decline. EBITDA margin
improved YoY by 100bps to 11.1%, supported by gross margin expansion. Company
reported PAT of Rs156mn, 6% higher over 2QFY19.
 FIEM continues to outperform two wheeler industry on the back of market share gain with
few clients. We expect the transition from halogen to LED will continue over the medium to
longer term; however given steep increase in two wheeler cost to end customer and general
slowdown in demand, we expect the process to be slow in the near term. FIEM will be
starting production at bank angle sensor plant in 4QFY20. Company expects revenue of
Rs500-600mn in FY21 from this product.
 In the past four quarters, the company’s EBITDA margin has sustained above 11% and the
company aims to improve it further to 11.5%-12% going ahead.
 We retain BUY on the stock with revised price target of Rs549 (earlier Rs523), valuing the
stock at a PE of 10x on FY21E earnings.
Note: The above is brief note on the company, based on the research reports dated 18th
Nov’19 and available on our website at:
https://www.kotaksecurities.com/ksweb/ResearchCall/Fundamental
Market Strategy
December 2019
ESCORTS LTD: BUY

 Escorts is well-positioned to benefit from a normal monsoon, higher reservoir levels and
improving MSPs for rabi crop in the near term. KIE believe Escorts is well-placed to benefit
from the structural tractor demand potential in India. Strong growth in the railway business
will also support margins of the company.
 2QFY20 result - Net revenues declined by 5% yoy to Rs13.2 bn. The revenue decline was
due to (1) 5% yoy decline in tractor revenues and (2) 19% yoy decline in construction
revenues, which was partially offset by 20% yoy growth in railway segment revenues in
2QFY20. Escorts reported 2QFY20 EBITDA of Rs1.27 bn (-20% yoy) and net profit of Rs1.05
bn (+2% yoy). Tractor EBIT margin came in at 10.3% (down 440 bps yoy).
 The company highlighted that the domestic tractor industry may decline by 5% yoy in
FY2020E, which implies flattish yoy growth in 2HFY20. Domestic tractor industry volumes
were down by 10% yoy in 2QFY20. Escorts’ market share was marginally up yoy at 11.2% in
2QFY20.
 In the construction equipment segment, the company expects to achieve 4% EBIT margin
in FY2020 and 7-8% EBIT margin in this division over the next two-three years. Railways
segment has an order book of Rs5 bn as of September 30, 2019. The company expects the
railway division to grow by 15-20% yoy in FY2020.
 KIE maintains BUY rating on the stock with fair value of Rs1,030, valuing the stock at15X
Sep 2021E EPS.
Market Strategy
December 2019
JYOTHY LABORATORIES LIMITED (JYL): BUY

 After a few disappointing quarters, JYL reported a healthy print with 8.5% revenue growth,
solid in the context of a broader slowdown. In Q2FY20, the fabric care portfolio grew 13.1%
yoy, Dishwash segment grew 8.6% yoy and Personal care segment reported a 6.9% yoy
growth.
 Volume/topline growth was aided by step-up in promotional intensity; this showed up in

yoy GM contraction despite a favorable input cost environment.
 Management indicated improvement in consumer sentiment ahead of the festive season

and expects the good monsoon to drive an uptick in rural demand.
 Management continues to guide for 10-12% revenue growth for the year, hinging on a big
recovery in the HI segment in the next two quarters.
 The RM environment continues to be fairly benign, which should help see stable margins.
 We fine-tune our model – some topline weakness is offset by some cut in ad-spends. Retain
ADD with a TP of Rs 200; believe JYL’s portfolio has the potential to deliver.
available (dated: 22nd Oct’19) on our website at:
Market Strategy
December 2019
SUN PHARMACEUTICALS LTD: BUY

 In Iine quarter; US continues to drag while domestic drives the growth; ADD with upward
revised fair value of Rs 480.
 Sun Pharma reported sales of Rs 81.2 Bn, 17% YoY growth driven by domestic business;
EBIDTA stood at Rs 17.8 Bn, 16.3% YoY growth; EBIDTA margins were 21.9%; Profit for the
quarter was Rs 10.6 Bn. Gross margins at 72.1% were 110 bps higher than KIE estimates,
given the geographical mix.
 Global Speciality sales for the quarter stood at $90 mn bulk of which are from Absorica and
Levulan; KIE expects Ilumya to reach US$145 mn sales in FY21, and further increase to
US$177 mn in FY22; Cequa is likely to contribute from 4QFY20.
 US ex-Taro sales unexpectedly declined US$85 mn qoq to US$339 mn, as against KIE
estimates of US$390 mn, with the management attributing it largely to the loss of a one-
time supply contract. RoW and EM sales were largely in line with KIE estimates.
 KIE believes that the market concerns on the specialty pipeline are now adequately
captured in the current valuation. with upward revised Fair Value of Rs 480/share
 KIE maintains estimates and ADD rating on the stock
Market Strategy
December 2019
FEDERAL BANK LTD: BUY

 Federal Bank reported 57% YoY growth in Q2FY20 earnings majorly due to lower income
tax provisions (down ~65% YoY). Pretax profit was up 15% yoy in Q2FY20
 Bank reported ~15% YoY loan growth (down from ~20% in earlier quarters). Growth in retail
lending (25% YoY) and agricultural loans (20% YoY) was robust but there was weakness in
corporate loans (~8% growth from 30-40% range until 9MFY19).
 Overall deposit growth and CASA growth were strong at 18% YoY and 13% YoY respectively.
This resulted in 10bps increased in CASA ratio to ~32%.
 Gross NPL and Net NPL increased 6% and 10% QoQ to Rs. 36.1 bn and Rs. 18.4 bn
respectively. Gross NPLs and Net NPLs stood at 3.1% and 1.6%, respectively at the end of
Q2FY20. Slippages were higher at Rs. 5.4 bn (1.9% of loans). Bank has ~ 15% exposure to
HFCs and NBFC. 98% of HFC exposure and 97% of NBFC exposure are ‘A’ rated and above.
 KIE forecasts: loans to grow at ~15% CAGR over FY19-20E. NIM to marginally increase by
10bps over FY19-22E to 2.8%. Gross NPL to remain broadly stable at around 3% levels until
FY22E. CASA ratio to remain in the range of ~32-33% driven by 15% CASA CAGR over FY19-
22E
 KIE maintains its BUY rating on the stock with fair value of Rs. 120 (from Rs. 130) valuing
the bank at ~1.7X book and 13X September 2021E EPS for RoEs in the range of ~14% in
the medium term and strong earnings growth of ~25% CAGR in FY19-22E.
available (dated: 16th Oct’19) on our website at:
RATING SCALE (KOTAK SECURITIES – PRIVATE CLIENT GROUP) / KOTAK INSTITUTIONAL EQUITIES
Definitions of ratings
BUY – We expect the stock to deliver more than 15% returns over the next 12 months
ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months
REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months
SELL – We expect the stock to deliver < -5% returns over the next 12 months
NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for
information purposes only.
SUBSCRIBE – We advise investor to subscribe to the IPO.
RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there
is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing,
an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA – Not Available or Not Applicable. The information is not available for display or is not applicable
NM – Not Meaningful. The information is not meaningful and is therefore excluded.
NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.
FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Rusmik Oza Arun Agarwal Amit Agarwal, CFA Krishna Nain
Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG M&A, Corporate actions
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+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 7907
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+91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6432 +91 22 6218 6433
Sumit Pokharna Pankaj Kumar Deval Shah K. Kathirvelu

Oil and Gas, Information Tech Midcap Research Associate Support Executive
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+91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6425 +91 22 6218 6427
TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain
shrikant.chouhan@kotak.com amol.athawale@kotak.com Research Associate Research Associate
+91 22 6218 5408 +91 20 6620 3350 faisalf.shaikh@kotak.com siddhesh.jain@kotak.com
+91 22 62185499 +91 22 62185498
DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP)

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe
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+91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810
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Market Strategy

Amit Agarwal, CFA

1-year performance of benchmark global indices (%)

MSCI India 8.3%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Source: Bloomberg dated 29 November 2019

Market performance – sector wise (November 2019)

Source: Bloomberg dated 29 November 2019

TOP INVESTMENT IDEAS

The US-China Trade War: Important timeline

As on date Total US tariffs applied exclusively to Chinese goods: US$550 billion

UK growth 'slowest in almost a decade'

UK quarterly GDP (%) since the financial crisis

IMF cuts Eurozone growth forecasts due to slowdown in Germany, Italy

Euro GDP (%)

Hong Kong elections

Contained Crude prices

Global oil demand-supply

Source: Bloomberg dated 28 November 2019

Gold corrects on hopes of US China trade deal

Prices of Gold (USD/Ounce)

2QFY20 RESULTS WERE AHEAD OF EXPECTATIONS

Comparison of 2QFY20 PBT of Nifty-50 stocks, actual versus expected

IIP growth slumps again

Sectoral Classification of IIP

GDP growth slips to a 26-quarter low

FY20 GDP growth at 4.7%

CPI inflation at a 16-month high, while WPI inflation moderates

CPI inflation likely to trend towards 4.6% by March 2020

Source: Bloomberg dated 28 Nov 2019

Weak GST collections

Monthly GST collections have remained stagnant in FYTD20 (Rs bn)

18-Jun 160 220 495 81 956 6.5

Without any expenditure cuts, government would need higher borrowings

External sector remains weak

Foreign trade for India in US $ bn

Exports 26.38 26.67 (1.1) 26.03 1.3 185.95 190.15 (2.3)

Most high-frequency monthly indicators remain weak

Key growth indicators (yoy, %)

Convergence or continued divergence?

Limited options for government to reverse economic slowdown.

Push to privatization: Strategic sale in 5 PSUs

Privatisation options for Government

ONGC 1,679 64.2 1,079 223

Strong FPI inflows in November 2019

FPI/FII inflows YTD till Novermber 2019

January -42.62 -13.01 0.07 -55.56

Economy in Focus in Winter Session of Parliament

Important new bills in winter session

Impasse in Maharashtra ends

A weaker-than-expected performance by the BJP in Maharashtra elections may possibly spur

Seven states are due for elections in the next 18 months

Banks and diversified financials (NBFCs)

Oil and Gas

Metals & mining

One Year Rolling Fw PE chart of Nifty-50

Based on Bloomberg 21.0

consensus the one 19.0

its previous peaks of 13.0

One Yr Fw PE chart: Nifty-50 Vs Mid Cap 100 Index

MSCI India Premium Over MSCI EM (on 1 Yr Fw PE basis)

MSCI India trades at 80%

FIEM INDUSTRIES LTD: BUY